SINTEX 2QFY11: FY10-12E EPS CAGR of 31%; Buy says Edelweiss

 SINTEX 2QFY11: Below est due to execution spillover; Mgmt guidance and our estimates unchanged; FY10-12E EPS CAGR of 31%; Buy

-          Sintex Industries (SINT IN, MCap US$1.3b, CMP Rs424, Buy) 2QFY11 results are below estimates as heavy monsoons throughout the country led to spillover of execution into subsequent quarters.

-          Management has reiterated its FY11 guidance of 25% growth in revenue and 30-35% growth in PAT.

-          We maintain our estimates for FY11 and FY12; FY10-12E EPS CAGR is 31% with RoE improving from 18% levels to 20%.

-          Stock trades at an inexpensive P/E of 11x FY12E EPS of Rs39. We maintain Buy with a target price of Rs468 (12x FY12E EPS).

2QFY11 below estimates due to execution delays

-          Sintex reported 2QFY11 consolidated revenue of Rs9.2b, 10% below our estimate of Rs10.2b. The management mentioned that during the quarter, execution of monolithic and pre-fab projects was affected due to heavy monsoons throughout the country.

-          As the company accounts for revenue only on full completion of projects (and not percentage completion method), we believe there is a spillover of 2Q revenue into subsequent quarters. This is evident from a segment-wise analysis. For instance, 2Q pre-fab revenue is down 2% YoY and up only 12% YoY for 1HFY11. However, the company maintains its full year growth guidance of at least 20%, implying robust 26% growth in 2H given the spillover effect.

-          2QFY11 EBITDA margin at 18.6% is in line with estimate of 18.5%. One-off MTM forex gain of Rs150m is almost fully offset by one-off interest cost of Rs46m and prior period tax of about Rs80m. Adjusted PAT at Rs1b is up 34% YoY, ~11% below our estimate of Rs1.1b.

Execution delays affect 2Q revenue growth, specially in pre-fabs

Rs million	2QFY11	YoY (%)	1HFY11	YoY (%)	2HFY11E	YoY (%)	FY11E	YoY (%)
Revenue	9,231	29	18,337	33	22,597	16	40,934	23
Textiles	948	24	1,935	27	1,805	-7	3,740	8
Prefab	1,009	-2	2,146	12	3,026	26	5,172	20
Monolithic *	2,430	108	4,190	100	7,330	44	11,520	60
Custom molding	730	-3	1,604	23	2,655	19	4,259	20
Tanks	444	-1	884	2	875	15	1,759	8
Wausaukee	508	38	1,098	50	376	-49	1,474	0
Nief	2,245	25	4,767	24	4,117	-3	8,883	10
Bright Auto	665	51	1,219	49	1,167	7	2,386	25
Zeppelin, others	251	-34	494	-26	1,247	36	1,740	10

* including Rs600m booked under subsidiary Sintex Infra Projects in 2QFY11

Company maintains guidance; outlook positive for key businesses

The Sintex management has maintained its FY11 guidance of 25% topline growth and 30-35% bottomline growth. The outlook for its key businesses – monolithics, pre-fabs and custom molding – remains positive. The key drivers of growth going forward are –

-          Healthy Rs26b order book position in monolithic construction: Sintex's monolithics order book is at Rs26b, up from Rs23b as of end 1QFY11. This is despite execution of Rs2.4b during the quarter, implying fresh order inflow of ~Rs5b during 2QFY11. More orders are expected based on the bid pipeline, including bids with BSF and CISF.

-          New product launches in pre-fabs: Sintex has launched new products such as agri sheds, panels for cold chains and industrial worker shelters which have drawn favorable response. Ongoing government spend in schemes such as Sarva Shiksha Abhiyan (‘Education For All’) and National Rural Health Mission will sustain demand for traditional products such as rural classrooms and rural health clinics.

-          Recovery in power and auto sectors to boost custom molding: Sintex manufactures parts like polymeric insulators and meter boxes for the power sector. Its 100% subsidiary, Bright Autoplast, manufactures a wide range of products for the auto sector. Resumption of investment in the power sector and recovery in the auto sector are both positive for Sintex. Bright Autoplast has also started manufacturing electrical parts for leading customers like Schneider, in collaboration with Sintex’s French subsidiary, Nief Plastics.

-          Steady performance of overseas subsidiaries: Overseas subsidiaries, Nief France and Wausaukee US have managed to reasonably insulate themselves from global slowdown due to client diversification including auto, off-the-road vehicles, electricals & electronics, aeronautics & defense, medical equipment, wind energy, etc. They are now poised to benefit from both global recovery and outsourcing of intermediaries from within the Sintex group in India.

Sintex: Overseas subsidiaries performance in line with our full year estimates

	2QFY11	YoY (%)	1HFY11	YoY (%)	FY11E	YoY (%)
Revenue	2,753	28	5,864	28	10,357	8
Nief	2,245	25	4,767	24	8,883	10
Wausaukee	508	38	1,098	50	1,474	0
EBITDA	305	46	682	39	1,302	17
Nief	269	64	585	45	1,155	19
Wausaukee	36	-19	98	15	147	0
EBITDA Margin (%)	11.1	140bp	11.6	93bp	12.6	88bp
Nief	12.0	280bp	12.3	173bp	13.0	100bp
Wausaukee	7.0	-500bp	8.9	-272bp	10.0	0bp

Expect an acquisition in 2HFY11 to strengthen execution capability

-          Sintex management has indicated that it is eyeing an acquisition of an Indian company to strengthen its capability of executing construction orders. The indicative EV is Rs1.5-2b, and Sintex is likely to acquire controlling stake in a phased manner.

-          Our estimates do not factor in the impact of any inorganic growth pending greater clarity.

Sintex’s oil exploration subsidiary not a major concern

-          In its FY10 annual report, the Sintex management seems to have indicated that it is foraying into oil exploration. A 100% subsidiary, Sintex Oil & Gas Pvt Ltd, has successfully bid for three oil blocks under NELP-VIII.

-          The management has subsequently clarified that the bids were done under Sintex in order to meet the eligibility criteria. However, all further investments into the business will be done by the Sintex promoters in their own capacity, and the business will “not be carried by Sintex on its balance sheet”. Sintex is likely to end up as a minority stakeholder in the business.

-          We do not view this issue as a major concern.

No change in estimates; FY10-12E EPS CAGR of 31%; stock trading at 11x FY12E, target price of Rs468 (12x FY11E), Buy

-          Despite 2QFY11 being below estimates, we maintain our FY11 estimates given the spillover effect. We expect Sintex to clock FY10-12E revenue CAGR of 22% translating into PAT CAGR of 31%. RoE is also expected to improve from 18% levels to 20%.

-          At CMP, the stock is trading at an inexpensive P/E of 11x FY12E. We currently value Sintex at 12x FY12E to arrive at a target price of Rs468. Sustained earnings growth momentum holds the potential for valuation re-rating once there is greater clarity on issues like the oil exploration business and the proposed acquisition. We maintain Buy.